Foreign investment and issues of corporate governance in India

Description

Introduction: Foreign Investment can be defined as the acquisition by governments, institutions or individuals in one country of assets in another. Foreign investment covers both direct investment and portfolio investment and includes public authorities, private firms and individuals. For a country in which savings are insufficient relative to the potential demand for investment, foreign capital can be a fruitful means of stimulating rapid growth. In addition, direct investment may be a means...[Show more] of financing a balance of payments deficit. Direct investment often involves the setting up of subsidiary companies for the domestic production of goods which previously were imported from the parent company. (Bannock et al, 1998). External capital flows to developing countries have undergone fundamental changes during the past three decades. More recently rapid liberalization of financial markets and privatization of economic activity in developing countries have influenced them. The private sector has become the principal borrower in international capital markets and recipient of other private financial flows. Direct investment is often referred to as foreign direct investment (FDI). FDI inflows have increased in importance during the 1990s, becoming the single most important component of total capital flows to developing countries. FDI not only adds to external financial resources for development but is also more stable than other types of flows. FDI is typically based on a longer-term view of the market, the growth potential and the structural characteristics of recipient countries. FDI is generally preferred by the host country to portfolio management. FDI and the policies concerning it have a preponderant role as the engine of growth because of the diffusion of technology. FDI can contribute to technological upgrading in two ways: if it embodies a higher level of technology than domestic investment, it makes a direct contribution by raising the overall technological level of the host country; and it can also make an indirect contribution through positive externalities which benefit local enterprises. In recent years competition among governments to attract FDI has heated up. The main reason for this is the large number of developing and emerging market economies that have moved during the 1980s and 1990s from relatively closed state-led growth strategies and dirigiste policy regimes to more open and market friendly policy regimes, and have moved in the process to seek actively to attract FDI. For example, China alone has moved from a policy of virtually excluding FDI, until 1979, to successfully attracting an annual FDI inflow of over $40 billion by the mid–1990s–and in doing so has caused developing and emerging countries throughout Asia, and beyond, to worry about intensifying competition, with China and with each other, to attract FDI. The crisis that emerged in Asia in 1997 has tended, if anything, only to heighten those worries. [Oman, 2000]. The subject of corporate governance constitutes a very rich field for research. There is a great deal of work which needs to be done. This is all the more yes for some of the societies in Asia where the subject is very new. One of the significant features of the economic reform is the change that is taking place in the government-corporate relationship. The government has so far played the role of manager in the corporate sector. While in the East Asian models this role has become transformed into that of a “coach”, for a variety of reasons, this is unlikely to occur in India. On the other hand, there is greater likelihood of India moving towards the Anglo-American model, with the government emerging as a “referee”. In large measure, this would be close to the pattern of the political and bureaucratic system that emerged during the last four decades. To what extent this will inhibit India from emulating the East Asian pattern of growth remains to be seen. (Vaghul, 1997)